FRANKFURT – The European Central Bank on Thursday loosened its monetary policy to bolster the 18-country eurozone’s economic recovery.
Here are some basic facts about the central bank.
Q: Where did it come from?
A: The ECB was created by the Treaty of Maastricht, the basic treaty setting up the European Union. The treaty, which came into force in 1993, called for a single currency and a single central bank as a way of creating a closer economic and political union between member countries. The ECB came into existence on June 1, 1998 and the euro was introduced on Jan. 1, 1999.
Q: Who runs it?
A: The ECB is run by a 24-member governing council, made up of the heads of the central banks from the 18 euro countries, plus a six-member executive committee. The executive board, which includes the ECB’s president, runs the bank day-to-day at its headquarters in Frankfurt, Germany.
The president and executive board members are named by the governments of the countries that belong to the euro in consultation with the EU parliament.
Q: What does it do?
A: The ECB plays a role similar to that of the U.S. Federal Reserve or the Bank of Japan. It serves as the issuer of the official currency, in its case the euro. It sets interest rates, a key factor in guiding the economy. And it plays an important role supervising commercial banks.
The ECB’s first job, according to the treaty, is to keep inflation under control. That is different from other central banks such as the Federal Reserve, which has a broader mandate to seek both low inflation and high employment.
The ECB is also tasked with supporting the economic goals of the EU, including growth and jobs. But stable prices come first.
Q: How does the ECB affect the economy?
A: The ECB’s main way of affecting the economy is through its benchmark interest rate, the refinancing rate, which determines what banks pay when they borrow money from the ECB. That in turn influences the rates banks charge for loans to customers such as businesses and consumers.
So the ECB can cut rates to spur economic activity when the economy looks weak. And it can raise interest rates to restrict credit when the economy is growing strongly. That helps prevent inflation.
The ECB can also use other, more unusual means to affect the economy. Those can include issuing loans to banks or purchasing bonds from banks to boost their finances.